Italian TP compliance and the challenges of drafting TP documentation

Within the Italian regulatory framework, managed transactions between related enterprises (an Italian resident entity and a non-resident counterparty) are topic to home switch pricing (TP) guidelines. Subsequently, earnings derived from such transactions ought to be decided based on the arm’s-length precept. Italian tax authorities can problem the switch costs utilized by the resident entity and assess the next earnings by way of a TP adjustment. In such a case, penalties starting from 90% to 180% of the upper tax due are utilized.

Multinational enterprises (MNEs) should not obliged to arrange and file any necessary documentation for TP functions. However, they may elect to arrange a set of TP paperwork to help the applying of the arm’s-length precept to inter-company transaction. ‘Acceptable’ TP documentation might grant the taxpayer safety from penalties in case of assessments (‘penalty safety’).

An administrative measure was printed in November 2020 (the 2020 Measure) by way of which the Italian Income Company supplied some up to date steering regarding TP documentation. Consequently, the regulatory framework might quantity to a burdensome compliance course of for MNEs wishing to arrange TP documentation.

Regulatory framework regarding TP documentation

With the goal of implementing the EU Code of Conduct on TP documentation, Italy launched two particular provisions permitting aid from penalties in case of evaluation on TP changes (the ‘penalty safety provisions’) if the next circumstances are collectively met:

  • Throughout accesses, inspections, audits or different preliminary exercise regarding TP changes, the taxpayer palms over to the tax authorities a set of documentation to attest the compliance of the worth utilized within the assessed transactions with the arm’s-length precept;
  • The documentation supplied is formally and considerably acceptable (appropriateness take a look at). This features a formal facet (i.e. the masterfile and localfile are in step with the requirements set by a measure of the Director of the Italian Income Company) and a considerable facet (i.e. the tax authorities considers documentation appropriate to offer the auditors with all the weather to evaluate the compliance with the arm’s-length precept); and
  • The taxpayer has beforehand communicated to the tax authorities, by flagging a selected field within the associated tax return, that it has TP documentation obtainable just about that monetary 12 months (‘earlier communication’). Supplied that the goal of the penalty safety provision is to reward virtuous enterprises which cooperate with the tax authorities, some courts have held the place that failing to offer earlier communication might quantity to a proper violation, nonetheless permitting the cooperative entity to learn from the penalty safety.

Tax authorities adopted the primary measure on September 29 2010 setting the formal and substantial requirements essential to confirm the consistency of the switch costs utilized with the arm’s-length precept.

The 2020 Measure launched some materials amendments to the earlier measure, with the goal of updating the home framework and making it in keeping with the 2017 OECD Tips. That is of specific relevance on condition that the appropriateness take a look at takes under consideration compliance with the requirements set by the tax authorities and it might end in granting or denying penalty safety.

The updates included within the 2020 Measure described under are more than likely to have an effect on the compliance burden of MNEs.

  • Beforehand, solely Italian holding or sub-holding corporations had been required to offer the tax authorities with a grasp file (in regards to the group) and a neighborhood file (concerning the enterprise), whereas Italian managed entities ought to solely present nation particular documentation. Ranging from 2020 a full set of TP paperwork, composed of a masterfile and a neighborhood file ought to be drafted by all enterprises (together with Italian everlasting institutions) getting into into managed transactions, no matter their standing as a holding, sub-holding or a managed entity.
  • The 2020 Measure broadened the scope of the knowledge and information to be supplied, aligning the content material of the documentation with the OECD Switch Pricing Tips and BEPS Motion 13. Among the many most related, two are price mentioning:
  • The nation file ought to embody detailed data regarding monetary information of the home entity, normally requested solely within the context of an audit (e.g. a monetary computation assertion reconciling the monetary information utilized in figuring out switch costs at an arm’s-length worth with the monetary statements); and
  • The masterfile ought to embody extra element on revenue technology components, group technique just about intangibles and inter-company monetary operations.
  • A major variety of paperwork ought to be hooked up to TP documentation, together with the group consolidated monetary statements, all APAs on TP and cross-border advance rulings signed with, or issued by, the tax administration of the international locations during which the group operates and a duplicate of all inter-company agreements concluded by the native entity referring to the managed transactions represented, together with any price sharing agreements during which the corporate is concerned for price sharing during which the corporate participates ought to be hooked up.
  • Particular documentation (or particular part to the native file) ought to be drafted for low-value including providers (whose arm’s-length worth will be decided by MNEs with a simplified strategy). Such documentation ought to embody, amongst others, an outline of the providers, the agreements regulating the availability of providers, the allocation standards used and the underlying causes for such alternative.
  • MNEs can now elect to arrange a ‘partial’ set of paperwork with reference solely to a selected set of managed transactions. This may restrict penalty safety to TP adjustment of the operations described.
  • Documentation ought to be sealed with a digital signature and a time stamp earlier than the deadline of submitting the annual tax return. Furthermore, the 2020 Measure seems to have restricted the circumstances during which it’s doable to amend the annual tax return after its submitting to incorporate communication of availability of TP documentation.
  • On account of the above, documentation is topic to a stricter ‘appropriateness take a look at.’

Furthermore, the mix of three of the above: (i) Grasp file extension to managed entities; (ii) Time stamp seal; and (iii) Up to date ‘appropriateness take a look at,’ might have a big impression on the compliance burden of the multinational enterprises, as defined in additional element under.

Impression of strict timing necessities

In accordance with the 2020 Measure, documentation ought to be sealed with a digital signature and a time stamp earlier than submitting the related annual earnings tax return deadline. In consequence, the total set of paperwork ought to be drafted, finalised and sealed earlier than the ultimate date (typically by November 30 of the next 12 months for calendar 12 months entities).

Failure to do that inside the required timeframe could end in a set of paperwork not passing the appropriateness take a look at thus excluding the taxpayer from the penalty safety regime.

Clarifications may very well be anticipated on whether or not the annexes ought to be sealed with the time stamp as nicely. The wording of the 2020 Measure appears to recommend that the seal ought to cowl the entire set of paperwork. This suggests that each one attachments ought to be obtainable to group entities earlier than the tax return deadline.

Whereas the OECD highlights that the drafting of TP documentation earlier than the submitting of the annual return is finest follow, within the Italian framework it’s now thought-about necessary.

Challenges related to this requirement are quite a few. For instance, managed entities could not obtain the grasp file or the required group data and information inside the Italian deadline. Equally, a MNE may very well be unable to well timed collect all of the monetary data to be included within the Native file regarding related enterprises which have been counterparties in managed transactions.

The compliance burden will get heavier with respect to the provision inside the supplied timeframe of the paperwork to be hooked up to the set (e.g. consolidated monetary statements of the group, present uni/bi/multilateral TP agreements, cross-border rulings, APAs, together with these to which the entity just isn’t a celebration however which can be associated to the inter-company transactions described).

The 2020 Measure clarifications – having regulatory nature – appears a very strict interpretation of the penalty safety provisions – having statutory nature: as highlighted, the penalty safety provisions don’t require the drafting of documentation or the gathering of annexes at any time earlier than the audit, that normally happens a number of years after.

Denying penalty safety to taxpayers for formal violations corresponding to omitting the time stamp earlier than the tax return deadline appears to be in distinction with the goal of the mechanism; that’s to reward the cooperative behaviour of virtuous taxpayers, who present the authorities with the required components throughout the course of the audit to carry out an acceptable arm’s-length evaluation.

Subsequently, it’s advisable for the tax authorities to offer formal affirmation on whether or not the omittance of a time stamp will suggest that penalty safety shall be denied.

Earlier communication to the tax authorities

Ordinarily, the taxpayer would flag a selected field within the annual tax return to attest the provision of TP documentation. Failure to take action would end in a breach of penalty safety provisions, though some courts have held {that a} comparable violation is of a proper nature, not stopping a cooperative entity to learn from the penalty safety.

The 2020 Measure narrowed the circumstances during which the taxpayer, who didn’t test the field within the related annual return, can amend its place earlier than any evaluation: this will solely occur within the occasion of a subsequent submitting of an ‘opposed’ integrative tax return that means a rise in taxable foundation or a discount in a tax credit score on account of a earlier misapplication of the arm’s-length precept. Clarifications are anticipated in an effort to prolong this chance to circumstances during which the integrative tax return leads to a decrease taxation.

Given the strict interpretation concerning the time stamp, communication to the authorities is beginning to seem as a proper requirement. Thus, a substance-over-form strategy on the timing of the communication seems significantly fascinating, on condition that the time stamp certification along with the handover of the documentation throughout an evaluation ought to be thought-about adequate for testifying the compliance inside the timeframe supplied for drafting the set of paperwork. Such an strategy would even be in keeping with the place held by some courts of legislation on the formal nature of violations regarding communication.

The ‘appropriateness’ take a look at

Tax authorities should not mechanically certain to use penalty safety to cooperative taxpayers handing over the set throughout the course of an audit: TP documentation is topic to additional scrutiny to confirm its ‘appropriateness.’

As anticipated, the ‘appropriateness’ take a look at contains each formal and substantial features. On the subject of the previous, the 2020 Measure expressly contains the digital signature and the time stamp as formal necessities. The tax authorities can deny penalty safety if these necessities should not met. Documentation that seems compliant with the formal scheme however lacks an general full set of knowledge or present information that aren’t wholly or partially truthful shouldn’t cross the ‘appropriateness take a look at.’ Formal omissions or partial inaccuracies not more likely to impression the evaluation of the tax authorities shouldn’t compromise the penalty safety software.

Penalty safety ought to be granted in all circumstances during which the TP documentation is compliant in all materials respects (formally and considerably) with the brand new requirements and it offers the tax authorities with all of the related components to hold out an evaluation on the arm’s-length circumstances utilized. Failure to cross the ‘appropriateness take a look at’ ought to be particularly motivated by the auditors in case of adverse judgment.

The 2020 Measure additional clarifies that ‘appropriateness’ of the set of paperwork ought to be assessed no matter the truth that the tax authorities establish the TP strategies utilized or the comparable transactions/impartial events chosen within the documentation because the relevant one.

Remaining remarks

The requirements set by the 2020 Measure are fairly burdensome and improve compliance prices of the nationwide entities getting into into managed transactions. The impression is kind of vital contemplating that the tax authorities, throughout an evaluation, typically assume that the shortage of TP documentation is in itself a cause to justify TP changes leading to the next tax debt.

This new strict place raises some questions as to the reasonableness of the compliance efforts required by the MNEs, and, in the end as as to if the brand new strategy of the tax authorities is definitely compliant with a few of the clarification included within the 2017 OECD Switch Pricing Tips, that suggest as follows: “it’s subsequently vital for international locations to maintain documentation necessities affordable” to “guarantee conscious consideration to an important issues” in addition to “the place a jurisdiction requires specific data to be saved for switch pricing audit functions, such necessities ought to stability the tax administration’s want for data and the compliance burdens on taxpayers”.

Click on right here to learn the 2021 TP Particular Focus information

Cecilia Bonazza
Affiliate
Cordeiro Guerra & Associati
T: +39 055 200 16 11
E: [email protected]

Cecilia Bonazza is an affiliate at Cordeiro Guerra & Associati.

Cecilia advises Italian and worldwide shoppers in relation to tax issues regarding home and cross-border transactions in addition to tax structuring of extraordinary transactions in mergers and acquisitions (M&A), actual property and monetary areas.

Cecilia is a legislation graduate from Bocconi College, certified as a lawyer, and member of the Milan Bar. She holds an govt grasp’s diploma in wealth administration and tax planning regarding particular person and household estates from Bocconi College College of Administration in Milan.

Roberto Cordeiro Guerra
Senior founding companion
Cordeiro Guerra & Associati
T: +39 055 200 16 11
E: [email protected]

Roberto Cordeiro Guerra is the founding companion of Cordeiro Guerra & Associati and professor of tax legislation and worldwide taxation on the College of Florence.

Roberto is certified to follow earlier than Supreme Jurisdictions and he advises people, sports activities individuals and artists, corporations and multinationals in tax litigations, tax audits and settlements with the Italian tax authorities on a variety of points, together with TP, direct tax points, VAT and different oblique tax points.

Roberto is on the administration board of the Affiliation of Italian Tax Legislation Professors. He’s president of the Native Chamber of Tax Legal professionals in Florence.

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